Make To Stock–MTS Definition

What Is Make To Stock–MTS?

Make to stock (MTS) is a traditional production strategy that is used by businesses to match inventory with anticipated consumer demand. Instead of setting a production level and then attempting to sell goods, a company using MTS would estimate how many orders its goods could generate, and then supply enough stock to meet those orders.

Obviously, the MTS method requires an accurate forecast of this demand in order to determine how much stock should be produced. If demand for the product can be estimated accurately, the MTS strategy is an efficient choice for production.

Real World Example of Make To Stock–MTS

Manufacturing companies often use the MTS method to prepare for periods of high production. For example, many retailers, such as Target, generate most of their sales in the fourth quarter of the year. This means, however, that for the manufacturing companies supplying these retailers, a majority of their production has to come in the second and third quarters of the year, to prepare for the increases in demand.

Using the MTS production method, let's say that The LEGO Group, maker of the popular LEGO bricks and other toys, looks back at its previous years and surmises, based on past data, that demand will increase by 40% in the fourth quarter versus the third quarter. To prepare, the manufacturer produces 40% more of its toys in July, August, and September to meet the demand forecasts for the fourth quarter. Additionally, during the fourth quarter, LEGO looks at past numbers to see how much demand will decline from the end of the year to the first quarter of the new year, reducing production accordingly.

Drawbacks of Make To Stock–MTS

In theory, the MTS method is a great way for a company to prepare for increases and decreases in demand. However, inventory numbers and, therefore, production, are derived by creating future demand forecasts based on past data. There is a high likelihood that the forecasts will be off, even if by just slightly, meaning that a company might be stuck with too much inventory and too little liquidity. This is the main drawback to the MTS method of production: Inaccurate forecasts will lead to losses, stemming from excess inventory or stockouts. And in fast-paced sectors such as electronics or computer tech, excess inventory can quickly become obsolete.

Additionally, an MTS approach requires a company to retool or redesign operations at specific times, rather than maintaining a consistent level of production throughout the year. This constant adjustment tends to be costly, and the increased costs have to be realized by either the end consumer or the company itself.

The effectiveness of the make to stock (MTS) strategy is completely reliant on the ability of a company to correctly predict the future demand consumers or customers will have for its goods or services. The natural unpredictability of the economy and of business cycles can make MTS difficult to implement for any company, but the strategy becomes especially challenging when a company operates in an industry with cyclical sales cycles or seasonality.

Alternatives to Make To Stock–MTS

Common alternative production strategies that avoid the downsides of MTS include make to order (MTO) and assemble to order (ATO). Both tie production to demand, but in the case of MTO, the production of an item begins only after the company receives a confirmed customer order. ATO is something of a compromise between MTS and MTO: Basic parts are constructed in advance, but a finished product is not created until a confirmed order comes in.

So, using our example above: If LEGO is adopting an MTO strategy, it would not increase the production of, say, its LEGO bricks by 40% until and unless Target sent in a larger order for them. If it were taking an ATO approach, it might have the increased bricks made and ready, but wouldn't put together complete packaged kits of them until it received Target's order. This way, the risk of an inaccurate demand forecast is mitigated, as it's shared by both LEGO and Target.

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Inventory turnover is a ratio showing how many times a company has sold and replaced inventory during a given period. A company can then divide the days in the period by the inventory turnover formula to calculate the days it takes to sell the inventory on hand.